Using Donor Advised Funds to maximize your charitable deduction
by Molly Dean Bittner, Senior Vice President, Philanthropic Services
The idea of “bundling” gifts into a Donor Advised Fund (DAF) isn’t a new concept. In fact, DAFs have been a good option for donors with periodic surges in income to take advantage of a charitable deduction when they make a gift into their DAF, and then use their fund over several years to ensure consistent grant support to their favorite nonprofits.
Since the passage of The Tax Cuts and Jobs Act in 2017, the Community Foundation has frequently advocated the value of “bundling” charitable gifts using Donor Advised Funds. A significant change in the tax law was the increase in the standard deduction available to taxpayers, meaning fewer people are itemizing their deductions annually. Taxpayers, however, can still take advantage of itemization by “bundling” multiple years of charitable gifts into one tax year by using a DAF. By front-loading a Donor Advised Fund, you may be able to take advantage of a charitable deduction you’ve become accustomed to while still funding your favorite nonprofits with consistent annual gifts. Doing this may allow you to itemize in the year you add to a DAF, and then take a standard deduction in subsequent years, resulting in overall tax savings.
While advisors and nonprofit organizations have discussed this strategy significantly over the past year, it wasn’t until I had lunch with Community Foundation friend and donor Bobby Thalhimer that I realized many donors are just now starting to understand how the new tax laws are personally affecting their charitable giving and tax deduction. Here’s what he shared:
“I recognized immediately when the 2017 tax act was passed that I should cram into the remaining days of that year as many deductions as I could, including pre-funding to an even greater degree my DAF at the Community Foundation. I did both of those things. However, I did not have a mental grasp on how many donations I was making outside my DAF until much later—when I turned my 2018 tax information over to my accountant last month. Whoa! I gave away about $5,000 in small gifts in 2018, partial gifts for charity dinners, clothes to the thrift store and so on. I actually felt a stab of pain when I met with my accountant and faced the loss of these deductions.
“I set about my giving for 2019 with two aims. First, I doubled down my effort to maximize the giving through my DAF and to minimize all other types of gifts. Second, I called Molly Bittner because she needed to know how this experience hit me, so she could empathize with her other DAF donors.”
At the Community Foundation, we feel strongly about ensuring our donors are equipped with the right tools to make strategic decisions about their giving, and likewise we want to ensure the long-term sustainability of local nonprofits. If we can encourage our local donors to see how they can use Donor Advised Funds effectively, then nonprofits may not be as likely to see a difference in the annual contributions they receive.
As always, everyone’s situation is different. We recommend you discuss your personal situation with your tax advisor. If you have questions around Donor Advised Funds or about charitable giving strategies, I encourage you to contact my colleague Amy Singleton at 804-409-5613 or firstname.lastname@example.org.